Priscilla O’Clock, professor of accountancy, discusses tax time
Why do we dread tax time? Most people dread tax filing because they view it as a complicated process that requires them to gather up all those important documents that may have been misplaced and then find time in their busy schedules to either prepare the returns themselves or find someone to do it for them. I think they dread the “drudgery” of the whole process rather than resenting having to pay taxes. And most people are very honest in this self-reporting process that we have, so most would have no reason to fear tax time—just dread it.
What do people seem to find most confusing about filing their taxes? I find one of the common misperceptions is with respect to filing status. Many people think that if they own a home they can file as “head of household.” Also, in general, people refer to the “capital gains tax” in a very negative manner when, in fact, the tax on profit from sale of an asset (capital gains) is a beneficial tax rate that is lower than the individual's regular marginal tax rate. But the biggest misconception is in regard to getting a large refund. Many people use the withholding system as a forced savings account, so they can receive a large refund in April. They fail to realize they have just allowed the government to use their money, interest free, for more than a year.
What are the most common mistakes people make on their taxes? How can they avoid these mistakes? The most common mistakes are mathematical errors, and double-checking is my only suggestion to avoid them.
Is there a single, overriding piece of advice you can give people about tax preparation and filing? That’s a tough question. The answer would vary depending on the taxpayer’s income level. For higher income individuals with complicated transactions, my best advice would be in regard to recordkeeping. Most likely these individuals would have their tax returns prepared by a professional, and the cost for this service can be greatly reduced if the client comes in with good records.
I would advise individuals with either less-complicated transactions or only W-2 income to prepare their returns themselves and to e-file. Lower income taxpayers can take advantage of free e-filing through the IRS online or through VITA programs. The tax software available today is very user friendly and the average person should be able to prepare their returns using one of the tax packages. The return preparation is facilitated if you have the prior year’s return.